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Ukraine

Submitted by memelarda on Thu, 2010-10-14 05:51

Outsourcing index:

5

Rank:

26

Ukraine's achievements in information technology are impressive. It was the first to create the semiconductor-based computer in the USSR together with the automatic control systems used in the Soviet space project. Ukraine was a major contributor of the space industry for Soviet Union, and its Ukrainian National Academy of Sciences contributes more than 40 percent of all Soviet research. Kharkiv, the second largest city in the country, grew from a small defense outpost to one of the biggest scientific business and industrial hubs of Ukraine. It also became the location for most IT outsourcing service providers and sub-sectors of reputable western IT companies, with services that include database applications, system and low-level tools, games, and mobile systems.

The country has been dispensing software development services since the early 1990's. Its strength comes from a refocusing of its highly educated scientific workforce after the fall of the Soviet Union. Ukraine's IT market has surpassed its counterparts from the Central European and CIS countries. It even surpassed Russia’s growth rate. It currently has around 4,000 IT companies operating in its offshore development centers in Kharkiv, Kyiv, and other Ukranian megalopolises, with a market volume of about $2.2 billion.

Companies situated in Ukraine excel in the areas of scientific and creative research and development. The advantages of investing in Ukraine are minimized travel costs and communication time; cheaper project costs because it is not a member of the EU; and cultural adaptability, particularly with Europe the United States.

Some of Ukraine's investors include Mittal Steel, GE, KPMG, Delloitte, Kraft Foods, Siemens, Ericsson, Johnson & Johnson, and Hewlett-Packard. Due to its relatively small workforce, Ukraine outsourcing industry is predicted to merge with other companies. An example is the Norwegian IT company EDB, who bought two local software development companies in Ukraine.

The global financial crisis has significantly impacted Ukraine’s economy, shrinking it to only 14 percent per year. Its Real GDP growth dropped from 7.7 percent in 2007 to 2.1 percent in 2008. However, its outsourcing industry remained stable despite this, only decreasing slightly in the second half of the global financial crisis.

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Country overview

Ukraine, once known as "Kievan Rus", was a prominent figure in Eastern Europe's political and cultural environment. It was under Moscow’s rule after the Treaty of Pereyasav, and became one of the founders of the Soviet Republic. Ukraine claimed independence after the fall of the Communist bloc, co-founding a new Commonwealth of Independent States. Despite independence, Ukraine continued to live under the shadow of its Soviet-era economy. The Ukraine focused on integrating itself with the West, which consequently led to tense relations with Russia. These tensions manifested in sharp rising costs of imports, Russia increasing fuel prices four times in 2006, instigating an energy crisis in Ukraine and ultimately affected at least ten EU countries.

Ukraine’s population is situated between Europe and Asia, with a two-hour direct flight from major European cities. The nation’s population is the second largest in Eastern European, after Russia. It is larger than Poland by almost 10 million and twice as big as Romania. The principal languages are Ukrainian and Russian, with Ukrainian Orthodox Church and Greek Catholic Church the most dominant religions in the country. Ethnic Ukrainians make up most of the population, with a small number of ethnic Russians and Belarusians spread in different areas of the country. The most heavily populated places are found in the eastern and southeastern industrial regions. Unlike Russia, which requires numerous visits to the consulate for short-notice trips, visitors are not required to bring a visa to go to the country.

Ukraine was once an important arm of the former Soviet Union. The Soviet dissolution marked a turning point for the country, opening itself to a market economy that led to an eight-year recession. The 2008 global economic crisis also plunged its economy into a downward spiral. According to an EBRD statement in 2007, Ukraine's economy is experiencing dynamic growth, especially in the eastern regions of Ukraine, namely: Kharkiv, Luhansk, Dnipropetrovsk, and Donetsk. Today, its gross domestic product (GDP) is around USD $136.6 billion, following Romania, Israel, and Malaysia.

Ukraine is not yet a member of the EU, so its population does not have the option of taking jobs outside its borders. However, it has lower living costs compared to its EU neighbors, helping ease the pressure on increasing salary rates. Consequently, this lowers their outsourcing rates, especially when compared to its EU neighbors. According to Ukraine's State Statistics Committee, an average salary in its capital, Kyiv, is only around USD $329 every month, while its second largest city, Kharkiv, is only USD $186.

Employee compensation

Ukraine is not a part of Schengen Zone, limiting its people from work abroad. Consequently, the country offers lower wages compared to EU members, making the average salaries of managers and programmers lower than other Eastern European countries. For example, Software Engineers with one to four years of experience are around 33 percent to comparable resources to the U.S. It is not competitive when compared to the dominant players of outsourcing such as India, the Philippines, and China, but next to Poland, Ukraine is the second best European country for salary costs.

For business process outsourcing operations, salaries for non-voice resources with one to four years of experience do not come cheap. Junior BPO resources in Ukraine command more than 50% of US salaries, averaging USD $21,388. Skilled BPO non-voice resources are around 46 percent of U.S. resources, while Operations Managers command around 55 percent compared to its U.S. colleagues.

Real estate and taxes

The property cost differences across Ukranian towns are high, especially in the central cities like Kyiv. Office occupancy costs in this city are around USD $45.4 per square foot annually, compared to the Philippines ($23.6), the U.S. ($42.2), Canada ($42.6) and Hungary ($43.9). Major obstacles that Ukraine is experiencing are the taxation and legal systems; many businesses are dissatisfied with these existing systems, often hesitating to legalize their actual sales due to flawed taxation/legislation structures. It is often easier to pay development works through bank accounts abroad than abiding by Ukraine's laws. Consequently, huge sums of money are in foreign bank accounts and not being reinvested in the Ukrainian economy.

The volume of IT services exports is an indicator of the size and maturity of a country’s IT sourcing sector. According to data collected from the International Monetary Fund (IMF), Ukraine exports around $316 million USD compared to Russia ($1.64 billion), Czech Republic ($1.31 billion), Hungary ($1.12 billion), Romania ($988 million), and Poland ($938 million).

Education and skills

Ukraine's adult literacy rate is around 99 percent of the population, with 6.3 percent of its GDP spent on education.

Ukraine is ranked second among the countries with the highest number of university-educated population, following Canada. Third in the list is the United States followed by Bulgaria, Mexico, and Hungary. It ranks sixth in the world for the most graduates, with China, the U.S., and India leading the list. It also produces one of the largest numbers of science and technology graduates every year, following Malaysia, Russia, Mexico, and Jordan.

Ukraine’s strength lies in its strong scientific bent, tracing back to its history with the Soviet Union. There are around 700,000 scholars in 80 research institutes, with 70 percent of adult Ukrainians obtaining a secondary higher education. The country's universities primarily focus on social and technical sciences, including foreign languages. It is not unusual to find outsourcing executives teaching in the universities, recruiting new talents to join their organizations.

Technological readiness

A country's Internet access is a strong indicator of a population's technological readiness. According to the International Telecommunications Union, Ukraine has a below average access to the internet, with around 22.5 users per 100 inhabitants compared to the top five countries with the most users: Canada (75.5), the U.S. (74), Malaysia (62.6), Czech Republic (58.4), and Hungary (54.9). Similarly, its broadband Internet access is below average, with only 3.5 percent subscribers of the internet for every 100 inhabitants. Canada (29), the U.S. (25.4), Israel (22.7), Czech Republic (17.1), and Hungary (15.4) are the leaders in the list.

Economic competitiveness is an important factor for an outsourcing location's long-term growth. Ukraine belongs at the bottom of the list, with a GCI score of 4 compared to China (4.7), the Czech Republic (4.7), Poland (4.3), India (4.3), and Russia (4.2). Its macroeconomic stability, which consists of government debt, interest rate spread, inflation, national savings rate, and government surplus or deficit is low, with a GCI score of 4 compared to the leading countries with the highest macroeconomic stability: China, Chile, Thailand, Mexico and Canada.

Infrastructure

Many analysts believe that Ukrainian companies are not fully supported by the government, which is why many companies are hesitant to establish business within its borders. Consequently, many Ukrainian firms learn to rely on their own resources to achieve business goals. In addition, Ukraine’s road quality is at the bottom of the list, with just a 2.2 GCI score followed by Poland (2.1), and Romania (2).

Labor market efficiency and regulation

Flexibility in the hiring and firing practices and regulations is a vital component in achieving a competitive business environment. While the United States and Canada maintain the most flexible employment market in the world, Ukraine falls in the lower half of the list. It is at the bottom of the list of countries with the most difficult business environment. Ukraine ranks 145 globally for ease of doing business.

Corruption

Some say that the recession is proving to be an opportunity for more corrupt occurrences in Ukraine. This problem has been a critical barrier for foreign companies for decades, and the government is unwilling to address these problems. For example, if an investment was eclipsed over by local businesses, they could turn the odds on them through bribing judges and other politicians. More often than not, it is the big companies that are dominating the scene because they have the money to coerce those in power.

Legal and intellectual property protection

Procedures to enforce contracts are vital to all business operations, especially when enforcing and processing contracts. According to a survey conducted by the World Bank, Ukraine ranks second (after the Czech Republic) for fewest steps to enforce contracts. It also takes only 345 days to enforce contracts compared to the outsourcing giants: China (456 days), the Philippines (842 days), and India (1,420 days). Ukraine is expensive for contract enforcement, costing 41.5 percent of the total claim value.